1 Year of Freelancing

Just a few days ago, I passed the 1 year mark of freelancing, and I thought it’d be a good opportunity to look back at the year and share some thoughts. So, without any further ado, and in no particular order, here’s what I’ve learned so far.

Find clients and then quit

I knew I wanted to give freelancing a try long before I quit my job, and because of this, I was able to bootstrap my business while still earning a regular salary. I highly recommend this. Instead of quitting your job and then trying to figure everything out, start doing it while you’re employed and you don’t have to worry about where your next paycheck is coming from.

By the time I quit my job, I had incorporated my company, found my first clients, and I had been freelancing on the side for a couple months. The extra income I earned on the side gave me the financial cushion I needed to make the switch, and on the day I quit, I knew I was going to have money coming in, from the clients I had already lined up.

Pay yourself a salary

One of the best decisions I made when I started was to pay myself a salary each month. I decided on a set amount, and wrote myself a check every month on the 1st, just like I was at a real job. Even if the company makes 2x my “salary” in a month, I still pay myself the exact same amount.

Since I was happy with what I was being paid at my previous job, any extra money the business earns just builds up as a savings buffer in its bank account, giving me peace of mind. It also is a great way to enforce the difference between business and personal money.

Freelancing is a business, treat it like one

Along the same lines as my salary point, it’s really important to realize that freelancing is a business, and you should treat it as one, even if it’s just you. This means having a separate business bank account, hiring an accountant and a lawyer, and keeping track of profit, expenses, and more.

It’s also important to have time to work on your business, rather than in it. You might be making loads of money, because you’re billing every hour to clients, but you’re leaving no time to plan out your business, which is really important. Once your current client work ends, you won’t have anything in your sales pipeline, since you haven’t had any time to focus on it.

This, in particular, is something I am trying to improve on—too often I’m heads down, working on client projects, when I should be reserving some time every week to work on the business.

Keep learning

One of the most enjoyable parts of freelancing has been everything I’ve had to learn on the business side of things. While I’ve been developing software for a while now, I had basically zero experience running a business until last year. In particular, the following books were, and continue to be, incredibly helpful:

  • Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants: This is an awesome reference on the legal side of freelancing. In particular, the section on contracts was super helpful.
  • Double Your Freelancing Rate: Pretty much anything Brennan Dunn puts out is gold. Even if you’re just starting and don’t yet have a freelancing rate to double, this is a great read on selling yourself as a high value freelancer. If you don’t want to buy DYFR yet, don’t miss all the free content on his site.
  • The Positioning Manual for Technical Firms: Lots of great advice on how to position yourself as an expert
  • The Brain Audit: I’m still working on putting what I learned from this book into practice, but it was a great read on why people buy, and how to attract exactly the type of clients you want.
  • The E-Myth Revisted: A classic book on building a business that can scale, using systems. The main takeaway from this book is what I mentioned above: work on your business, not in it.

I also went to a few conferences this year, and the one that I’m still thinking about is PeersConf. I learned so much just by talking to other freelancers and agency owners, and all of the talks were phenomenal. I can’t wait to go again next year.

It’s not as complicated as you think

There’s certainly been a lot to learn since starting out on my own, and when I started, I was worried I wouldn’t be able to figure it all out. From sales to legal issues, it all seemed super overwhelming. Looking back now, it really wasn’t so bad. Sure, it hasn’t necessarily been easy, but it’s certainly not impossible. Once you get started, you’re always learning and always getting better.

For instance, having to do sales probably scares a lot of people away from going out on their own, but at the end of the day, it’s not like you have to be Steve Jobs to land a client or two. You just have to be willing to talk to a lot of potential clients and try to learn something from every interaction you have. As long as you keep learning and improving, you’ll get there, and that’s coming from someone who still has a lot of learning still to do!

Benefits are just money

A common concern potential freelancers share is losing all the benefits of a full-time job: health insurance, 401k matching, paid vacation, and more. At the end of the day, these are really just money. Sure, once you’re out on your own, you’re going to be paying for health insurance yourself, and there won’t be a company matching your 401k contributions, but if you’re not making enough to cover these benefits, you’re not charging enough.

In some ways, figuring out your own benefits can lead to saving money as well—if you want to, you can elect to pick health insurance with a high deductible, to save on monthly premiums. And, for retirement savings, you actually have the ability to save way more money with something like an Individual 401k or a SEP IRA than the typical company plan.

Goals for next year

My #1 goal for next year is to really nail down a sales strategy/pipeline. I’ve had the luxury of finding some longer term clients, which has made me lazy on the sales side of things, but that won’t last forever. Building a consulting company that I can run for the next 20 years won’t happen unless I figure this out.

After that, I’m hoping to start experimenting with working with subcontractors, to be able to take on larger projects and not have everything depend solely on me. Down the line, I can definitely see myself hiring employees, so testing the waters by subcontracting some work out feels like a good place to start.

Basic Accounting for the Starting Freelancer

When you’re first thinking of becoming a freelancer, it can certainly be overwhelming. Not only are you faced with the prospect of having to find work on your own, but you have to figure out how to run a business too, and that includes accounting, which can be intimidating. You might be afraid that an accountant is going to be expensive, or that if you don’t do everything right from the beginning, it’ll result in huge headaches down the line. I certainly was.

The good news: you can start small, and it doesn’t have to cost you very much, if anything. While eventually, you’ll definitely want to hire an accountant, you don’t need to wait until you can afford one to start freelancing. When I started, I hadn’t yet found an accountant to help me, and I’m no worse for the wear (though I found a local CPA pretty quickly, and I’m happy I did!).

To be certain you’re taking care of the basics, make sure you have the following steps covered:

1. Open a separate bank account

This is critical! Having a separate account makes it much easier to keep track of business expenses and income, which makes everything much easier come tax time. This doesn’t even need to be an actual business bank account—just a separate checking account that is only for your freelance work. When you’re buying something business related, use this account.

2. Keep all of your receipts

Make sure you have a record of all business expenses. You don’t need a fancy system for this: at a bare minimum, keep any paper receipts in a folder. Ideally, they should be scanned in and saved digitally, so they can be searched and backed up. There are two reasons to keep your receipts: first, if you’re ever audited by the IRS, they’ll want to see them, and second, once you switch to a true bookkeeping system, it’ll help you to figure out what all the charges in your bank account are actually for.

3. Save money for taxes

As an employee, your employer does the work of taking estimated taxes out from your paycheck, so you don’t usually end up owing much, if anything, at tax time. As a freelancer, however, no one’s doing this for you. To make sure you’re not in trouble at tax time, make sure to set aside some portion of every invoice that comes in, and don’t touch it! A good rule of thumb is about 30%, but that definitely depends on where you live and how much you’re making. I prefer to go a little higher, just to be safe, but that’s totally up to you. Put that money in a separate account and don’t touch it until tax time.

Depending on where you live, you probably owe quarterly estimated taxes for the IRS and potentially your state, so make sure you’re keeping on top of those too. Here’s more on that from the IRS.

4. Start budgeting for a CPA

As I said above, you don’t need an accountant from day one, but if you want to do things right, you should start planning on having one, at least to prepare your taxes at the end of the year. A good CPA (Certified Public Accountant) should save you money, even after their fee, because it’s their job to find you all of the available tax deductions when filing. Plus, you should be spending your time focusing on building your business, not filing your taxes.

An accountant can also help you get set up with bookkeeping software, such as QuickBooks or Xero. When I first started working with my CPA, he took some time to walk me through using QuickBooks, so I could keep track of everything myself. Once I learned the basics, I was comfortable doing all the bookkeeping myself, and if I have a question, I just send him an email. Following the first 3 steps above will make the task of importing your transactions much easier.

So, how much should you expect to pay for a CPA? I’d say anywhere from $500-$2000, depending on your situation. For me, I have an S-Corporation, which is slightly more complicated to file than just an LLC or Sole Proprietorship, so my bill last year was a little over $2000. When you’re talking to potential CPAs, be sure to ask them upfront how much tax filing will likely cost, and you can budget accordingly. Since your accountant’s fees are business expenses, they’re tax deductible, which certainly helps with the cost!

How should I structure my retainers?

One of the best ways to start creating recurring revenue for your freelancing business is to use retainers. They help make sure you’re paid up front, in full, and on a regular basis. Sounds great, right? But, how exactly should a retainer be structured?

While there are different types of retainers, I’m going to be talking about the simplest case: a client reserving your time in advance. Maybe they want to make sure they can have access to you in case of an emergency, or for ongoing development work. In this situation, it’s simple: figure out how many hours the client will need, multiply that by your hourly rate. That’s your monthly retainer fee!

For example, if your client needs 30 hours of your time, and your rate is $100, they owe you $3000 at the start of every month. During that month, you agree to set aside 30 hours of your time for them. If they don’t use the hours by the end of the month, they expire, and they have to pay for another month’s retainer. Any hours beyond the initial 30 hours are billed separately, at the same $100/hr rate.

How does this translate into terms? Here’s an example from my own contract:

Customer agrees to pay $100 per hour for 30 hours of work each month. The first month’s payment is due immediately upon contract signing. Thereafter, payment of $3000 is due in advance on the 1st of each month by business check or credit card.

Fees for hours beyond the 30 provided per month will be invoiced separately at a rate of $100 per hour and payment is due within 14 days.

Hours expire on the last calendar day of the month and do not roll over. Unused hours will not be refunded.